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41 Cards in this Set
- Front
- Back
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What items MUST be included in engagement letters? |
1) Name of Entity 2) Management's responsibilities 3) Auditor's responsibilities 4) Fees - payment terms |
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What items CAN be included in engagement letters? |
1) arrangements regarding conduct of audit, use of specialists or internal auditors, obtaining information from predecessor auditors, fees billing 2) examination of internal control over financial reporting 3) limitation of liability of auditors or client 4) conditions under which access to the auditors' working papers may be granted to others |
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What are the 6 steps of audit planning? |
1) Decide whether to accept or renew prospective client 2) obtain/update knowledge of client's business and environment 3) make preliminary arrangements with the client 4) prepare the engagement letter 5) assess risks of material misstatement including fraud risk 6) prepare the audit plan, preliminary program, and the time budget |
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What is the nature of a client's business? |
competitive position organizational structure accounting procedures ownership capital structure product/service lines critical business process internal control |
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What are the industry and regulatory factors? |
competitive environment supplier and customer relationships technology developments major laws and regulations economic conditions |
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What factors make the industry attractive? |
barriers to entry strength of competitors bargaining power of suppliers of raw materials and labor bargaining power of customers |
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How do you measure and review a client's performance? |
budgets key performance indicators segment performance reports balanced scorecard external parties |
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What does the chief goal of an audit boil down to? |
Identifying audit differences |
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If an auditor identifies risks that do not have a possible impact on the financial statements, what should he/she do? |
Not investigate them further |
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What are the 3 steps to developing an overall audit strategy? |
1) Planning Materiality 2) Assessing inherent risks, including fraud risks 3) Preliminary assessment of control risk |
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Which rules require meeting of the audit team to communicate fraud risks and susceptibility to fraud? |
SAS 109 and 99 |
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Define quantitative |
If the amount is immaterial based on its numeric impact - 5% of net income - .5 to 1% of sales/assets - 1% of total equity |
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Define qualitative |
-circumstances that overrule anything less than the quantitative guidelines -example: earnings date, debt covenant |
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Two types of fraud risks |
1) Fraudulent financial reporting (management fraud) 2) Misappropriation of assets (defalcations) |
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What are the procedures to assess fraud risks? |
1) Discussion among engagement team 2) Inquiries of management and other personnel 3) Planning analytical procedures 4) Considering fraud risk factors |
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What the three fraud risk factors? |
Incentives Opportunity Attitude |
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What are the considerations in identifying fraud risks? |
- Type - Significance - Likelihood it will result in a material misstatement - Pervasiveness |
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What is the overall response to fraud risks? |
- Professional skepticism and audit evidence - Assigning personnel and supervision - Accounting principles - Predictability of auditing procedures |
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What the alterations in audit procedures in response to fraud risk? |
More reliable evidence Shifting timing to year end Increasing sample sizes |
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What is the response to the possibility of management override? |
Examining journal entries Review accounting estimates for biases Evaluating the business rationale for significant unusual transactions |
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What should an auditor do if he discovers fraud? |
-communicate to appropriate level of management -communicate to audit committee if fraud involves senior management or material misstatement |
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What are the objectives of substantive programs for asset accounts? |
Establish: - existence - rights - completeness - appropriate valuation - clerical accuracy of the underlying records - appropriate presentation and disclosure |
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What are the 7 steps of the Audit Process? |
1) Understand client & internal control 2) Identify inherent risks of material misstatement, including fraud risks 3) Determine the planned assessed level of control risk and design additional tests of controls and planned substantive tests 4) Perform additional tests of controls 5) Reassess control risk and modify planned substantive tests 6) Perform substantive tests and complete the audit 7) Form an opinion and issue the audit report |
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How do you test if all receivables exist? Which management assertion is this? |
-Confirm a sample by communication with debtors -Existence / Occurrence |
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How do you test if client has right to receivables? Which management assertion is this? |
-Vouch a sample to sales agreements -Rights / Obligations |
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How do you test if all receivables are recorded? Which management assertion is this? |
-Compare a sample of shipping documents to related sales invoices -Completeness |
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How do you test if receivable records are accurate and agree with general ledger? Which management assertion is this? |
-Obtain an aged trial balance of receivables, test its clerical accuracy, and reconcile it to ledgers - completeness |
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How do you test receivables are presented net realizable value? Which management assertion is this? |
Investigate the credit ratings for delinquent and large receivable accounts Valuation / Allocation |
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How do you test if receivables are properly presented in the balance sheet, with appropriate disclosures? Which management assertion is this? |
Perform procedures to identify receivables from related parties Presentation and disclosures |
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What makes up the interim period? |
Planning Consideration of Internal Controls Test of Internal Controls Interim Substantive Tests |
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When are final substantive tests? What occurs during this time? |
After the balance sheet date Controls are updated |
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How does an auditor understand the risk of new engagement? |
1) Get authorization from management to discuss with predecessor auditor 2) Find out from predecessor - reason for termination - disagreements with management |
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What does a new engagement inherently rely upon? What must be reviewed? |
It relies on the "opening balance sheet" Predecessor workpapers must be reviewed |
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In addition to relying upon the report of another auditor, you must also do what? |
1) audit at least 50% of the assets, revenues, equity and income 2) make reference to other auditors if opinion is significant 3) ensure the other auditors are independent of the principal and related entities |
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What does the audit committee of a public entity do? |
Appoints the auditors & pays their fees |
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What makes up the Board of Directors? |
- 5 financially literate members - an audit committee |
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What makes up the audit committee of the BOD? |
- 3 members of the BOD - all members must be independent - must be chaired by a financial expert |
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What are the responsibilities of the audit committee? |
- approve appointments of auditors and their fees - oversee internal audit - required communication with auditors and resolve matters raised |
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Do private companies need a BOD & audit committee? |
No but it is a good idea |
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In establishing completeness, are the auditors generally more concerned with assets or liabilities? |
Liabilities -- an unrecorded liability may indicate an unrecorded expense |
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How do you test for a liability that has not been recorded? |
Utilize Hindsight -- search for unrecorded liabilities |
